NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed the 'BBB+' long-term Issuer Default Rating (IDR) and senior unsecured debt ratings of Exelon Corp. (EXC) on Rating Watch Negative. The actions follow today's announcement of a definitive agreement to acquire Pepco Holdings, Inc. (PHI) for $6.9 billion (plus transaction fees). Prior to this action, EXC's Rating Outlook was Negative.
The cash offer will be financed with a combination of EXC corporate debt and equity and proceeds from planned asset sales at subsidiary Exelon Generation Co., LLC (Exgen, 'BBB+'/Outlook Negative). Including assumed debt of approximately $5 billion the enterprise value is $11.9 billion. The purchase price equates 11.5x PHI's 2013 EBITDA.
The ratings of EXC's subsidiaries and those of PHI ('BBB') and its subsidiaries are unaffected by this transaction. Post-closing, PHI will become a second tier holding company of EXC and will remain as the direct parent of its three operating utilities Potomac Electric Power Co. ('BBB' IDR), Delmarva Power & Light Co. ('BBB+') and Atlantic City Electric Co. ('BBB').
Rating Drivers
Financing plan: The proposed acquisition results in a meaningful increase in consolidated leverage compared to EXC's current and projected stand-alone financial condition. The rise in leverage is driven by the combination of the acquisition debt to be issued by EXC and the assumption of existing PHI consolidated debt. EXC has indicated it plans to fund 50% of the acquisition price with corporate debt and the remaining amount with mandatory convertible debt, equity and proceeds from planned asset sales. The mandatory convertible securities typically used in the utility sector (equity units) do not receive any equity credit from Fitch.
Business risk: Fitch did not consider the acquisition of PHI to meaningfully lessen EXC's business risk. The pro forma earnings contribution from regulated businesses increases to approximately 60% to 65% of pro forma earnings over 2015-2016 compared to about 55% to 60% on a stand-alone basis. Consequently, the non-regulated generation business remains significant.
Financial measures: Fitch expects consolidated cash flow leverage and fixed charge coverage measures of the combined entities to remain solidly within the 'BBB' category but meaningfully weaker than EXC's standalone credit profile without a significant reduction in the risk profile. Fitch forecasts Debt/EBITDAR in the first full year of operation to be less than 4.0x and FFO fixed charge coverage in the range of 5.5x to 6.0x.
Regulatory Approvals: Regulatory approvals are required by each of PHI's four regulatory jurisdictions Maryland, Delaware, the District of Columbia and New Jersey, as well as the Department of Justice (DOJ) and the Federal Energy Regulatory Commission (FERC). EXC expects to close this deal in the second or third quarter of 2015.
Rating Triggers
Positive: Positive rating action is not likely at the present rating level.
Negative: Regulatory concessions in excess of those assumed in the financial forecasts or a reduction in asset sale proceeds that is not funded with equity could have an adverse effect on ratings.
Even without the completion of this merger ratings may also be lowered in recognition of EXC's willingness to pursue a leveraged acquisition and/or if there is not a material improvement in wholesale power prices.
Fitch has placed the following ratings on Watch Negative:
Exelon Corp.
--Long-term IDR 'BBB+';
--Senior unsecured debt 'BBB+.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);
--'Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)' (March 11, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722085
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Additional Disclosure
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